Qad Inc. v. ALN Associates, Inc.

• Decision Date: 07 January 1992
• Docket Number: No. 88 C 2246.,88 C 2246.
• Citation: 781 F. Supp. 561
• Parties: qad. inc., et al., Plaintiffs, v. ALN ASSOCIATES, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

781 F. Supp. 561

qad. inc., et al., Plaintiffs, v. ALN ASSOCIATES, INC., et al., Defendants.

No. 88 C 2246.

United States District Court, N.D. Illinois, E.D.

January 7, 1992.

Ernie L. Brooks, Thomas A. Lewry, Robert C. Brandenburg, Brooks & Kushman, Southfield, Mich., Jami E. Bay, Chicago, Ill., of counsel, for plaintiffs.

Robert E. Wagner, Alan L. Barry, Michael D. Lake, Joseph A. Fuchs, Wallenstein, Wagner & Hattis, Ltd., Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

This action was initially brought by qad. inc., Karl Lopker and Pam Lopker (collectively for convenience "qad"¹) against ALN Associates, Inc., Sally Allen, Mike Allen and Ronald Whiteford (collectively for convenience "ALN"), claiming various breaches of contract, copyright infringement, misappropriation of trade secrets, unfair competition (under both federal and state law) and the making of false representations to qad.² ALN in turn launched its own claims against qad. All of the claims stem from a basic dispute as to competing computer software distributed by the parties.

On July 3, 1991 this Court issued an opinion vacating the July 17, 1989 Preliminary Injunction Order (the "Order") that it had issued against ALN on copyright infringement grounds following an extended hearing conducted between April 6 and May 3, 1989 (the "Hearing").³ qad, having lost the advantage that it had gained improperly through issuance of the Order, has since filed two motions seeking to undercut the Opinion materially or even to render it entirely toothless:

1. what qad labels as its "Motion for Summary Judgment that ALN Is Not Entitled to Damages as a Result of the Entry of the 1989 Preliminary Injunction" and

2. its motion "for confirmation of the scope of the Court's July 3, 1991 Opinion."

Both motions have now reached the fully-briefed stage. This opinion will deal with them in turn.

ALN's Entitlement to Damages

Despite the label just quoted in the preceding paragraph, which would suggest that qad was focusing on ALN's inability to recover (or at least to establish) any damages flowing from what the Opinion had found to be a wrongfully-issued preliminary injunction, in principal part the original submission filed by qad in support of its motion devoted itself to urging that the Opinion was flat wrong. qad's arguments along those lines occupied fully three-fourths of its initial 14-page supporting memorandum. This Court therefore directed the parties orally, at the next status hearing in the case (held on October 15, 1991), to limit themselves to the damages issue.⁴ On that score both parties point to the decision in Coyne-Delany Co. v. Capital Development Board of the State of Illinois, 717 F.2d 385 (7th Cir.1983) to support their respective positions (qad Mem. 11, 14; ALN Mem. 2-3; qad R.Mem. 3-4). Both sides cannot of course be right. And not surprisingly in light of the most recent history of this litigation, it turns out to be qad rather than ALN that has mischaracterized the facts and the law.

It is black letter law that the amount of a preliminary injunction bond normally sets the ceiling for damages obtainable by a party that is later found to have been wrongfully enjoined (Coyne-Delany, 717 F.2d at 394). But Coyne-Delany, id. at 393 also expressly recognizes that the ceiling is lifted where the other party had acted in bad faith in obtaining the preliminary injunction (see also the other Coyne-Delany references to the bad-faith exception, id. at 391 and at 394).

That latter exception to the ordinary rule, rather than the rule itself, clearly applies here. Opinion at 1266 n. 14 made it plain that the activities of qad's lawyer before the Copyright Office, although "highly suspect," were not to be the predicate for this Court's decision — so that footnote concluded by saying:

Thus qad's suggestion (P.Mem. 9) that its actions before the Copyright Office did not constitute "bad faith" is simply not relevant.

What this Court did decide was that qad's copyright misuse was "egregious" and that it involved "deception that has misled this Court into imposing unwarranted harm on ALN" (Opinion at 1267), that qad and its lawyers had "deliberately created" the "fog" that concealed the truth and had thus caused the wrongful issuance of the Order (id. at 1268), that "using its weapon of falsehood, qad pursued ALN in this Court — something that it could not have done without the advantage of its copyright" (id. at 1270), and "that its presentation at the Hearing was grounded in knowing falsehood" (id. at 1271).

Little wonder that the lawyer who is currently handling the matter for qad candidly acknowledged (July 1991 Tr. 6):

And we realize the bad faith and the other grounds that the cases supply would appear, at least at the threshold, to be found in the Court's opinion.

If there is any room left for doubt on the subject, it should be eliminated here and now. This Court so holds in express terms: qad did act in bad faith in obtaining the Order that improperly enjoined ALN.

What that leaves for decision, then, is the appropriate means to be employed for the determination of ALN's damages that it sustained by reason of the wrongfully issued Order. Coyne-Delany, 717 F.2d at 394 left open the question whether the proper route to that destination was a motion brought under Fed.R.Civ.P. ("Rule") 65 or the institution of a separate action of the malicious prosecution type (the latter path having been approved in Commerce Tankers Corp. v. National Maritime Union, 553 F.2d 793, 800 (2d Cir.1977)).

ALN does not now have such a separate action pending. Its Counterclaim Count III is captioned "Unfair Competition/Abuse of Process," and even though the prayer for relief in the Counterclaim asks for an "accounting" for damages sustained by ALN by reason of the claimed "abuse of process," the latter seems an odd label for qad's conduct now under discussion. Although ALN contends otherwise, this Court believes that it would be a stretch to read Count III as embracing the damages claim that this opinion has held to be viable.

But even if ALN were to amend its Count III so that it more directly tracked the elements of an Illinois malicious prosecution claim, that remedy would not appear to provide a totally comfortable fit to the situation here. For one thing, one essential element of a conventional malicious prosecution action is that the opponent's lawsuit must have been finally defeated on the merits, while here the only thing that qad has lost is the preliminary injunctive relief that it had originally obtained. Neither party has provided this Court with Illinois authority dealing with a comparable situation. Moreover, there may perhaps be other difficulties in characterizing the matter as a traditional malicious prosecution cause of action — but this opinion need not pause to analyze the matter further, given the conclusion announced in the next paragraph.

With no definitive directive available from our Court of Appeals, this Court considers it far preferable to opt for the Rule 65 alternative rather than to call for a separately-launched claim. With qad having been found by this Court to have abused the system by its bad faith pursuit and obtaining of a preliminary injunction, it seems more than reasonable to treat the enforcement of the consequences of that action — the award of any damages that were suffered by ALN as the injured party — as a remedy that comes within this Court's inherent power.⁵

In that respect, this Court draws a leaf from the recent decision in Chambers v. NASCO, Inc., ___ U.S. ___, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), where the Supreme Court looked to the inherent-power concept as the source of judicial power to impose sanctions for a litigant's bad faith conduct.⁶ There the approved sanction took the form of shifting the adversary's attorneys' fees to the offending party, notwithstanding both (1) the existence of the so-called "American Rule" that generally prohibits such fee-shifting and (2) the inapplicability of Rule 11 to the bulk of the offending conduct (because it did not consist of the filing of papers). Although the remedy that is contemplated for the bad-faith conduct involved here is compensatory (the payment of damages sustained by ALN) rather than punitive (the shifting of fees), that distinction would seem to cut in favor of — rather than against — the granting of that remedy in the exercise of this Court's inherent power to protect the integrity of the justice system. There is much in Chambers that could be quoted here in support of this Court's analysis and conclusion, but just two samples should suffice (111 S.Ct. at 2132, 2133 (numerous citations omitted)):

Of particular relevance here, the inherent power also allows a federal court to vacate its own judgment upon proof that a fraud has been perpetrated upon the court. This "historic power of equity to set aside fraudulently begotten judgments," is necessary to the integrity of the courts, for "tampering with the administration of justice in this manner ... involves far more than an injury to a single litigant. It is a wrong against the institutions set up to protect and safeguard the public." Moreover, a court has the power to conduct an independent investigation in order to determine whether it has been the victim of fraud.

* * * * * *

In this regard, if a court finds "that fraud has been practiced upon it, or that the very temple of justice has been defiled," it may assess attorney's fees against the responsible party, as it may when a party "shows bad faith by delaying or disrupting the litigation or by hampering enforcement of a court order." The imposition of sanctions in this instance transcends a court's equitable power concerning relations between the parties and reaches a court's inherent power to police itself, thus serving the dual purpose of "vindicating judicial authority without resort to the more drastic

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